Options Trading Tutorial

Someone explain stock options to me?

Ok so I finally applied for options trading on my TD ameritrade account and I was approved for "Level 1" which is... "Write covered calls; write cash-secured puts" What does that mean? Does that mean I can start buying stock option contracts for any company I want?

Public Comments

1. An option is a contractual right to buy or sell a block of 100 shares. If buy one contract of GE at $50 expiring in Dec 09. That means I get the right but not the obligation to buy 100 shares of GE at $50. A call means the right but not obligation to buy. A put is the right but not obligation to sell. A person who writes an option is selling them and it works in reverse. When you write a call, you sell the right to force you to sell 100 shares of x stock. So if you were to write a covered call means that you can sell a call option against the stock you own. However for your purposes you should know options are highly complicated and can cause you great trouble and have massive leverage. So the best advice for you is if you do not intimately know the following terms, Put, Call, Collar, VIX, CBOE, BlackSholes then I STRONGLY recommend avoiding options and stick with ordinary investing. Even pros can get creamed very quickly with options.
2. <<<Someone explain stock options to me?>>> There are a series of tutorials at http://www.cboe.com/LearnCenter/Tutorials.aspx which will explain stock options to you far better than anyone can as a simple answer to your question. <<<I was approved for "Level 1" which is... "Write covered calls; write cash-secured puts" What does that mean?>>> (1) A covered call is when you sell a call option and you own the underlying stock. For more information on covered calls see http://www.cboe.com/Strategies/EquityOptions/CoveredCalls/Part1.aspx (2) A cash-secured put option is when you sell a put option and you have enough cash in your account to buy the underlying stock if you are assigned. For more information on cash-secured puts see http://www.cboe.com/Strategies/EquityOptions/CashSecuredPuts/Part1.aspx <<<Does that mean I can start buying stock option contracts for any company I want?>>> No. If you are only authorized to write covered calls or to write cash-secured puts, the only options you can buy are options you have previously written. (You are allowed to "buy to close" but not to "buy to open".) To write an option means to sell an option you do not already own. Sometimes this is called "sell to open" and sometimes the word "write" is used; they mean the same thing. ----- Option trading is not that difficult if, and only if, you take the time to learn about options before trading them. To learn enough to make money with options on a reguclar basis you probably need to read at least one good book about options.
3. it means you can use covered calls and cash secured puts, you cannot sell calls without owning the stocks or write puts without cash.